Director and officer (D&O) liability insurance protects the personal assets of corporate directors and officers, as well as their spouses, in the event that they are personally sued for actual or alleged wrongful acts in managing a company by employees, vendors, competitors, investors, customers, or other parties.
Legal bills, settlements, and other expenditures are frequently cover by the insurance, which also protects the corporation. D&O insurance provides the financial support for a conventional indemnification clause that protects executives from losses incurred as a result of their role in the company. Many officers and directors will require both indemnity and D&O insurance from a company.
Suits are filing against directors and executives for a variety of reasons connect to their roles in the corporation, including:
- Financial losses or insolvency as a result of a breach of fiduciary obligation
- Asset misrepresentation by the corporation
- Misappropriation of company funds
- Fraud
- Noncompliance with workplace regulations
- Theft of intellectual property and customer poaching by competitors
- Lack of corporate governance
D&O insurance does not usually cover illegal conduct or illegal gains.
Is D&O Insurance Necessary for Your Company?
It’s a prevalent misperception that D&O claims are primarily a phenomenon of public companies. In reality, according to a recent Towers Watson poll, public, private, and non-profit organizations all face the danger of D&O litigation.
Non-profit organizations should consider investing in D&O insurance if they have a corporate board or advisory group. It is not necessary for your company to generate tens of millions of dollars in revenue for your directors and officers to be personally sueing for their management of the company’s activities. Smaller enterprises with fewer assets, on the other hand, may require protection just as much as huge, well-funded corporations.
Types and Costs of D&O Coverage
Directors and Officers (D&O) insurance policies provide liability coverage for non-profit, for-profit, and privately held businesses. Directors and Officers insurance protects them from legal fees and damages that may develop as a result of managerial choices that have financial ramifications. D&O insurance is a risk that affects all businesses.
D&O insurance can be obtained separately or in conjunction with other types of insurance. It’s usually buy for the advantage of the company’s officials and directors. Smaller businesses may find that purchasing a combined policy that covers D&O and Employment Practices Liability insurance to cover employee-related claims including harassment, discrimination, and wrongful termination is more cost-effective. Crime and fiduciary coverage may be include in some comprehensive insurance.
Three types of coverage may be included in a standard D&O insurance policy for a privately held company:
- A-side Coverage. If the company cannot indemnify them, such as if the company has declared bankruptcy, this section covers directors, officers, and sometimes workers for defense costs, settlement payments, or judgements. B-s
- B-side Coverage. When the company indemnifies its directors, executives, and workers, this protects the corporation.
- C-side Coverage . This is also known as “entity coverage,” as it financially protects the corporation as a whole. The limits available to protect individual officers and directors may be reduce if the entity is covering.
The cost of D&O insurance is determined by a number of criteria, including the type of business, revenues, prior legal claims, and the amount of debt owed.
Take a look at some of the most common D&O risks and claims.
Here are a few examples of real-life situations that resulted in D&O lawsuits:
Breach of fiduciary duty.
Creditors of a corporation in financial distress and in need of financing sued the company’s directors and officers for failing to locate, appraise, negotiate, and arrange the sale of firm assets in a timely way, causing the company to default on its outstanding loans.
Investors sued a corporation, arguing that some of its officers had personal ties to a third-party contractor engaged to retool the company’s manufacturing line, and that they hired the contractor to serve their own personal interests, not the company’s. Other officials and directors were accusing of deliberately colluding with one another, or at the very least breaching their duty of care, by proceeding with the project without thoroughly investigating the contractor’s qualifications.
Failure to follow working regulations.
After being fire, a female employee sueing the company’s directors and officers for wrongful termination based on gender discrimination.
Intellectual property theft.
A vice president quit his job to start his own business. His former employer filed a lawsuit against him and his new firm, saying that he took corporate licenses to market proprietary software, causing unfair competition and trademark infringement.
Misrepresentation.
A substantial contract was arranging between a corporation and a customer. For the firm to satisfy production and delivery deadlines, financial and human resource assets were necessary. The directors overstating the business’s revenues and skills, and the firm couldn’t satisfy the contract’s requirements once it was awarding. The customer filed a lawsuit.
Explore for more interesting articles at Article Mug
